What is Illinois Doing

1
What is Illinois Doing?? A Construction Walk
Through of the Legal Maze
2

• OBJECTIVES
• Discuss indemnity hold harmless agreements
• Discuss Changes in the Law with Virginia Surety
  and Kajima Construction Cases
• Clarify purpose of Additional Insured
  Endorsements
• Provide Solutions to the Challenges Caused by
  the Recent Illinois Case Law
• Provide key issues to consider when underwriting
  contractors and providing sureties

3
Virginia Surety Case, Illinois Supreme Court,
2007

• Not wanting to duplicate protection provided by
  workers' compensation insurance, CGL policies
  exclude coverage for injuries sustained by the
  policyholder's employees.
• However, there is an important exception to this
  exclusion for "insured contracts."

4
(No Transcript)
5
Indemnity/Transfer Liability Defense
Hold Harmless/ Assume Coverage
6
(No Transcript)
7

• The Big Three
• Limited Form
• Intermediate Form
• Broad Form

8

• Limited Form
• Only covers indemnitors negligence
• Does not cover indemnitees negligence
• Possible reimbursement of legal fees

9

• Example
• The Subcontractor shall indemnify and hold
  harmless the General Contractor.from and against
  all claims, damages.. arising out of the work of
  the subcontractor, but only to the extent caused
  by the negligent act or omission of the
  Subcontractor..

10

• Intermediate Form
• The most common form
• Covers negligence of indemnitee
• Does not cover sole negligence of indemnitee
• May include active negligence
• Is it enforceable?

11

• Example
• The Subcontractor shall indemnify and hold
  harmless the General Contractor .from and
  against all claims, damages.. arising out of the
  subcontractors work provided it is caused in
  whole or in part by any negligent act or omission
  of the Subcontractor..

12

• Broad Form
• Indemnification for sole negligence
• Most comprehensive form
• Is it enforceable?
• Clear and Unequivocal

13

• Example
• Subcontractor assumes and agrees to hold
  harmless, indemnify, protect and defend General
  Contractor against any and all liability
  including the sole negligence of the General
  Contractor..resulting from any and all
  operations performed by the Subcontractor..

14

• Which is the Excellent Risk?
• You receive applications for two General
  Contractors. Based on the following indemnity
  agreements, which is a better risk
• The Subcontractor shall indemnify and hold
  harmless the General Contractor .from and
  against all claims, damages.. arising out of the
  subcontractors work provided it is caused in
  whole or in part by any negligent act or omission
  of the Subcontractor..
• Subcontractor assumes and agrees to hold
  harmless, indemnify, protect and defend General
  Contractor against any and all liability
  including the sole negligence of the General
  Contractor..resulting from any and all
  operations performed by the Subcontractor..

15

• Trick Question
• General Contractor The Broader the Better
• Maximize the risk transfer allowable by state

16

• Which is the Excellent Risk?
• When reviewing applications for Subcontractors
  which State presents the excellent risk
• State that allows Broad form indemnity
  agreements?
• State that does not allow Broad form indemnity
  agreements?

17

• Answer
• State that does not allow Broad form indemnity
  agreements
• Subcontractor As Limited as Possible

18

• Third Party Actions Over

19
(No Transcript)
20

• Third Party Actions Over
• Intermediate form of the indemnification
  agreement
• The entire purpose of indemnification agreements
  is to transfer risk from one party to another.
• GC requires indemnification and hold harmless
  for concurrent liability or liability caused
  in part.

21
Virginia Surety Case-Importance

• The case signals a change for what had been
  recognized law in Illinois and supported law in
  nearly all of the state jurisdictions which
  recognize the intermediate form agreement as
  valid.

22
Virginia Surety Case, Illinois Supreme Court

• If a policyholder assumes liability for the
  negligence of another party, as part of a written
  contract with a client, then this exception to
  the exclusion provides insurance coverage for the
  assumed tort liability of another.

23
Virginia Surety Case, Illinois Supreme Court 2007

• Where a subcontractor waives the so-called
  Kotecki cap and promises to "indemnify" the
  general contractor -- these commonplace
  provisions are not "insured contracts" as defined
  by CGL.

24
Virginia Surety Problems

• Illinois construction contracts, every single
  "insured contract" will involve an unenforceable
  contract (Not for Maintenance Contracts)?
• Risk Transfer is Huge for GC's versus
  Subcontractors
• Uninsured Gap for Contractually Responsible
  Losses
• Are Surety Bonds on the Hook For Contractual
  Performance?

25
Virgina Surety Solutions

• Remedy this risk transfer- mandating strict
  adherence to AI's being named on the policy by
  the GCs before the job starts.
• Specifically request a declaration sheet, and
  policy provided to the general or subcontractor
  from the lower tier contractor before any work to
  obviate this risk.
• Modify exclusions under both the EL and CGL
  Policies.

26

• Insuring Transfer of Risk

27

• Applicability to the Policy
• Loss date vs. execution of contract
• Is the contract an insured contract
• Does not cover breach of contract, only
  liability assumed under contract
• Prior contracts may be included
• Indemnitee as an additional insured

28

• Master Pak- Additional Insured
• Requires a written contract
• Executed prior to the loss
• Arise out of real property
• Caused by ongoing operations
• No coverage for sole negligence

29

• Key Master Pak Considerations
• Limits of coverage
• General Contractor- no limits in agreement
• Subcontractor- limits in agreement
• Excess unless specified primary
• General Contractor- specified primary and
  non-contributory
• Subcontractor- no specification of primary

30

• Kajima Construction-
• Illinois Supreme Court 2007
• Order of coverage
• Supreme Court to decide if additional insured
  status on both a primary and excess policies
  forced the subcontractor's insurer to bear the
  entire risk for the loss.
• "the deselected insured or insurer's primary
  policy must first answer for the loss before they
  may invoke coverage under any excess policy."

31
Kajima Construction-Illinois Supreme Court 2007

• 1) Coverage for Additional Insureds under the
  Primary policy pursuant to the contract
• 2) Coverage under your own policy of insurance
  for your primary insured amount
• 3) Coverage as Additional Insured under any
  excess policy pursuant to the contract 
• 4) Coverage under your own policy for your excess
  amounts. 
• What about Multiple Tenders????

32
Kajima Problems

• General Contractor who may have believed that
  they were insulated from exposure with the
  requirements of excess insurance may not need to
  rewrite their contracts. 
• What is the risk for insurance carriers and
  underwriters due to account for this change?

33
Kajima Solutions

• Multiple Tenders under Targeted Tender Rule in
  Illinois
• Solid Additional Insured Contracts with Sub and
  Sub of Sub. Primary Non-Contributory
• Receive policy before agreeing to start work.

34
Questions??

• He that is surety for a stranger shall smart for
  it and he that hateth suretyship is sure.